Overview of the Canadian dairy industry

1. Overview of the Canadian dairy industry Gilles Froment Senior Director, Policy and Corporate Affairs Canadian Dairy Commission March 27, 2007

2. Outline • Dairy in Canada vs. the World • Canadian system and CDC • NMMP and CMSMC • 3 pillars of supply management • Seasonality programs • Milk pools • Marketing and innovation initiatives • Challenges: Markets, WTO and pricing

3. Canada vs. the World

6. Cow Milk Production Sources: IDF and CDC

7. World Prices for Cow Milk (2005, USD/100 kg)

8. The Canadian Milk Marketing System and its Components

9. Snapshot of theCanadian Dairy Industry • 15,522 farms, 463 processing plants • Milk sales: $4.6B • Adds a net $8.3 billion to the GDP • Processed products sales: over $11.5B • Supports $26 B of economic activity • Sustains more than 142,600 jobs

10. Further processor Producer Marketing Board (provincial) Retailer Processor Consumer Canada’s Milk Marketing System

11. The Canadian Dairy Commission • Crown corporation created in 1966 • Reports to Parliament through Minister • 3 commissioners, 63 employees • Generally deals with industrial milk • Total budget for 2006-2007: $6.8 million • Funded by government, dairy producers and the marketplace

12. Legislated Mandate • Provide efficient producers of milk and cream with the opportunity to obtain a fair return for their labour and investment. • Provide consumers of dairy products with a continuous and adequate supply of dairy products of high quality.

13. Overview of Key Activities • Chair the CMSMC • Calculate Estimated Requirements (demand) • Recommend Market Sharing Quota (prod. level) • Establish Support Prices • Administer Revenue and Market Sharing Agreements (pools) • Administer Special Milk Class Permit Program • Carry out external audits • Create and administer marketing programs • Remove surplus production • Administer Seasonality Programs

14. CDC’s Stakeholders • Dairy Producers • Processors • Further Processors • Consumers • Exporters • Governments

15. NMMP National Milk Marketing Plan • Federal-provincial agreement • Regulates marketing of industrial milk • Balances supply and demand • Sets out the establishment, distribution and adjustment of industrial milk quota

16. CMSMC Canadian Milk Supply Management Committee • Permanent body of signatories of the NMMP (voting members) – One vote per province • Dairy Farmers of Canada, Dairy Processors Association of Canada and Consumers’ Association of Canada (non-voting members) • Responsible for policy determination and supervision of the NMMP provisions • Meets 5 times a year • Most decisions require unanimity

17. The CMSMC directs the implementation of the National Milk Marketing Plan (NMMP) to coordinate actions of provincial producer boards and governments Sask (3) Quebec (4) Non-voting members DFC DPAC P.E.I. (3) CAC CDC chair Ontario (4) N.S. (3) Alberta (3) Newfoundland (3) B.C. (3) N.B. (3) Manitoba (3)

18. Industrial (Classes 2-4) used in the manufacture of butter, cheese, ice cream, yogurt, milk powders long shelf life federal responsibility – interprovincial movement of product Fluid (Class 1) used in 1%, 2%, skim milk, etc. and creams short shelf life provincial responsibility – historically made and consumed in province of origin Milk Categories

19. 3 Pillars of Supply Management • controlled prices • controlled imports • controlled production

20. Pillar 1: Controlled Prices • Industrial milk prices • are determined by provinces based on CDC support prices and vary depending on the end use of the milk • Support prices are the prices at which the CDC buys and sells butter and skim milk powder under its various programs. • Support prices are announced in December by the CDC to be effective February 1.

21. Support prices 1997-2007 ($/kg)

23. Pillar 1: Controlled Prices • Fluid milk prices • are determined by provinces according to a formula • In BC, Alberta and Saskatchewan:one formula (AEUB) • In Manitoba: another • In the Eastern Provinces: (40% indexed COP + 30%CPI + 30%PDI/capita) until Jan 31, 2010

24. Milk Prices in last 12 monthsFebruary 2006 – January 2007 • Average in-quota revenues : $67.63/hl • Average price for fluid: $77.32/hl • Average price for industrial: $61.09/hl

25. Example - Prices per component

26. Pillar 2: Controlled Imports • Most dairy products are protected by Tariff Rate Quota (TRQs). • Above TRQs, dairy products have a tariff of almost 300%.

27. Pillar 2: Controlled Imports • Examples of TRQ and over-quota tariffs

29. Pillar 3: Controlled Production • Provincial milk marketing boards allocate production quota to their respective dairy farmers. • This quota combines both fluid milk quota and industrial milk quota. • Fluid milk quota is established by provincial marketing boards and equals demand. • Industrial milk quota is established nationally by the CMSMC and is called Market Sharing Quota (MSQ). • Quota is calculated and expressed in kg of BF.

30. Establishing MSQ • The CDC calculates the Estimated Canadian Requirements (demand) on a monthly basis. • ECR= Production + Opening Stocks + Imports – Closing stocks – exports – DDPIP – Class 4(m) • MSQ is adjusted every two months when Estimated Requirements increase or decrease.

31. Evolution of requirements, MSQ and production (million hl)

32. MSQ Allocation to provinces • Before 1993: allocation strictly based on historical market share • 1993: increases in MSQ allocated 10% on population and 90% on historical shares • 2000: increases in MSQ allocated 90% on population and 10% on historical shares

33. Respecting production targets • Provincial production targets: • August-January – Minimum 97% • Dairy year – between 99.5-100% • Provinces are free to adjust their farm quota or not, however, provinces will be penalized if they over or under produce their share of MSQ. • Over production: no payment for the milk • Under production: quota cut the next year

34. CDC Seasonality Programs • While cows produce more milk in the spring and less in the fall/winter, people consume more dairy products in the fall/winter and less in the spring. • To offset this, the CDC buys and stores butter and skim milk powder in the spring and puts those products back in the market in the fall/winter. • These transactions are done at support prices.

35. Plan A Becomes the property of the CDC 25 kg blocks Plan B Must buy back within one year of production of the product One-pound prints ready for retail sales. Seasonality Programs - Butter

36. Managing Surpluses • Surpluses of milk solids non fat (SNF) arise because consumers want the fat portion of the milk more than the SNF portion and because production is on a fat basis. • The CDC buys the surplus SNF and disposes of it by exporting it or selling it for animal feed. • Both these markets yield a lower return to producers than regular sales.

37. IMPORTS According to WTO (3274 mt) Butter : sold to further processors Cheese: private sector imports (20400 mt) EXPORTS Subsidized exports according to WTO limits (none to USA) SMP (CDC exports to Cuba and Mexico) Permits for private exporters including non-contingent classes CDC Import / Export

38. The Milk Pools

39. Pools were established in themid-1990’s in response to… • Increased concentration at the retail and processing levels • New trade rules (FTA, NAFTA, WTO) • Differing provincial policies (for ex. Milk allocation to plants) • Fluid milk moving between provinces • Inequities in producer returns

40. Origin of the Milk Pools DISPC Report (1994): “that…the Canadian dairy industry move to a totally integrated system where all milkrevenues are pooled among all producers to maintain the sustainability of the domestic marketing system and address new market realities”

41. Creation of ProvincialMilk Pools FluidIndustrial All Milk B.C. --- --- 1995 Alta. 1975 1975 --- Sask. 1974 1974 1999 Man. --- --- 1974 Ont. 1968 1970 1994 Qué. --- --- 1996 N.B. 1973 --- 1993 N.S. 1985 --- 1993 P.E.I. --- --- 1996

42. The CDC administers 3 milk pools • The P10 (all 10 provinces) • The P5 (in the East) • The WMP (in the West) • These pools allow dairy farmers to share and balance revenues, markets and in some cases, transportation costs.

43. How do the Pools work?Pooling Example

44. How do the Pools work? Average Pool Price (hl) = $57.00

45. How do the Pools work?Pooling Example

46. What is pooled?

47. How pools are administered • Provinces report production and sales data (by milk class) monthly to the CDC. • The CDC calculates money transfers between members to equalize returns. • The CDC calculates quota allocations when demand changes. • The CDC keeps a bank account for pool operations.

48. Resulting in harmonization of… • Multiple component pricing • Producer prices • Milk classification • Quota policies

49. Marketing and Innovation Initiatives of the CDC

50. 1. The Dairy Marketing Program • Targeted to processors and further processors • A comprehensive Web site on dairy ingredients (www.milkingredients.ca) • Seminars and trade shows • Offers two new funds to support innovation in the use of dairy ingredients: Direct Access Fund and the Innovation Support Fund • 1 Innovation Champion to help companies with their innovation process